Gilat Satellite Networks Ltd. (GILT) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Gilat's Fourth Quarter 2018 Results Conference Call. All parties are present in a listen-only mode. Following the management’s formal presentation instructions will be given for the question and answer session. [Operator Instructions] As a reminder, this conference is being recorded, February 12, 2019. I would now like to turn the call over to June Filingeri of Comm-Partners LLC to read the Safe Harbor statements. June, please go ahead.

Thank you. Good morning, and good afternoon, everyone. Thank you for joining us today for Gilat's fourth quarter and full year 2018 conference call and webcast. A recording of this call will be available beginning at approximately noon Eastern Time today, February 12 and will be available for telephone replay until February 17 at noon. The webcast will be archived on the Gilat’s website for a period of 30 days. Also please note that investors are urged to read the forward-looking statements in Gilat's earnings releases with a reminder that statements made on this earning call that are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements, including statements regarding future financial operating results involve risks, uncertainties and contingencies, many of which are beyond the control of Gilat and which may cause actual results to differ materially from anticipated results. Gilat is under no obligation to update or alter these forward-looking statements, whether as a result of new information, future events or otherwise, and the Company expressly disclaims any obligation to do so. More detailed information about risk factors can be found in Gilat's reports filed with the Securities and Exchange Commission. With that said, let me turn to introductions. On the call today are Yona Ovadia, Gilat's CEO; and Adi Sfadia, Gilat's Chief Financial Officer. I would now like to turn the call over to Yona Ovadia. Yona, we are ready to begin.

Thank you, June. Good morning, good afternoon and good evening everyone and thank you for joining us. I am pleased to report our Q4 results as well as to provide a summary of our performance in 2018. At the end of my review, I will also provide some highlights on our objectives for 2019. Q4 was another strong quarter concluding the year of important progress for Gilat. In 2018, we continued to focus on building a mix of quality, profitable revenues through our growth engines of 4G LTE Cellular Backhaul for the mobile market, mobility in-flight connectivity and broadband. And in fact, full year 2018 revenues from our Fixed Network segment, which includes our Backhaul increased 24% from 2017, while our Mobility Solution segment including IFC increased 10% from the previous year. In contrast, Terrestrial Infrastructure segment revenues in 2018 were down 68% from 2017. This was in part expected as a construction phase of our first three regions in Peru for Fitel was winding down. However, delays in the inspection and approval process by Fitel delayed certain revenues into 2019. Fortunately, these delays are temporary and I will say more about that later in my remarks. In total, Gilat’s full year 2018 revenues were $266.4 million or 6% lower than 2017 while fourth quarter revenues were $69.7 million due again to the lower construction revenues in Peru. Even with the effect of Peru, we made substantial strides in improving profitability in 2018. GAAP operating income for full year 2018 increased 98%, virtually doubled from 2017 to $21.3 million. Adjusted EBITDA rose 35% to $35.2 million and GAAP net income reached $18.4 million or $0.33 per diluted share. I might add that this was accomplished while we made a significant investment in R&D which represented 12.4% for 2018 revenues, up from 9.9% in 2017. We plan to continue and make substantial investments in R&D in 2019 in order to maintain our product leadership in the markets which I will speak more about later. Let me now provide more details on our business with this review. In 2018, we continued to see progress in our strategic focus area of Broadband Connectivity. The year started with a major achievement with NBN Australia for a deal worth tens of millions of dollars, additional significant successes were achieved in collaboration with Hispasat in Brazil, Gazprom in Russia, JSAT in Japan and finally in China, the ChinaSatcom where our win of the ground network for ChinaSat-18 joined with our 2015 win of ChinaSat-16 makes Gilat the fastest solution for anyone who wants to benefit from the advantages of HCS Ka over China. Specifically in the fourth quarter, we closed new broadband connectivity business in Japan, where we secured a multi-million dollar project with the Japanese government agency called Local Authorities Satellite Communication or LASCOM in Mexico where we collaborated with Hispasat and jointly won the deal with Dish Mexico and in India where Gilat was chosen to provide broadband connectivity for their GSAT-11 multi-spot beam satellite recently launched by ISRO the Indian Space Research Organization. These substantial successes throughout the year demonstrates Gilat’s leadership in providing a high-performance, highly efficient ground networks. Regarding Cellular Backhaul, in 2018, Gilat also continued as the front-runner of 4G LTE Cellular Backhaul with extensions of projects with existing customers such as Globe in the Philippines, as well as new contracts wins including Telstra in Australia, and Altice in Portugal. In the strategic focus area of mobility, we achieved various milestones throughout the year. In 2018, Gilat significantly expanded the largest global IFC network which serves Gogo. Gogo recently reported ending the year with over a 1000 commercial aircrafts installed and activated with 2Ku solutions which includes the Gilat IFC’s modems. We also made significant strides with our Aero dual-band terminal including passing the standard for the environmental testing of Avionics Hardware and received the DO-160 certification. Another area of opportunity for us is the non- Geostationary Orbit, also known as NGSO constellation. Gilat achieved two important milestones in demonstrating successful trials of our mobility technology for LEO satellites, a first ever live in-flight demonstration for broadband connectivity over LEO resulted from the cooperation Gilat had with Global Eagle and Telesat and recently Gilat demonstrated exceptional maritime connectivity over Telesat LEO Phase 1 test satellite with a Tier-1 maritime service provider. This was an industry first milestone for maritime applications requiring exceptionally low latency and high bit rates. Going back to Peru, despite the delays in construction and inspection of the first three regions of Huancavelica, Ayacucho, Apurimac that were won in 2015, we expect to move to the operational phase of these regions in 2019 once the approval process by Fitel is complete. We also plan to complete the construction of the forest region Cusco in 2019 and then finalize the approval process with Fitel, as well as enter the operational phase in the first half of 2020. As we said several times in the past, our interest in Peru is mainly not the construction dollars but the operational fees and with gradual acceptance of the regions in 2019 and 2020, we look forward to moving to the operational phase of this project which yields higher margins. We remain committed to making Peru a source of recurring profitable revenue for Gilat. Lastly regarding 2018, and as I mentioned earlier, we have increased our investment in R&D in 2018 compared to 2017. As we look at the market and market trends, it is clear to us that there is growing demand globally for affordable broadband fueled in part by the availability and declining strides of satellite capacity. This creates the demand for technology that offers higher and higher throughputs and greater and greater efficiencies and this will continue with the appearance of enabling technologies and applications such as 5G. As the leader in LTE satellite backhaul, Gilat is ideally positioned to capitalize on this market need and we continue to invest significantly in advancing our technologies. As part of this investment, this quarter we announced a powerful 5G solution to provide new levels of speeds and capabilities in support of next-generation services. We are committed to continue to our continued investments in our products as I will elaborate in a minute. So in summary, 2018 was a year of important progress for Gilat as we advanced our business strategy and achieved substantial profitability growth. Looking at 2019, we will continue our focus on improving profitability by continuing to develop and expand our existing growth engines as we see continued reception to our services and solutions. As I described earlier, as the market constantly evolves and requires higher throughputs and greater efficiency, we will also continue to invest substantially in R&D and in our product roadmap and even in higher levels than 2018 to maintain product leadership especially in the era of NGSO and 5G. I am pleased to say that we have a healthy pipeline as we go into 2019 and therefore our management objectives for 2019 are revenue between $275 million to $295 million, which represents growth of between 3% to 11% from our comparable 2018 results. We expect GAAP operating income of $23 million to $27 million and adjusted EBITDA of between $38 million to $42 million. This represents an adjusted EBITDA increase of between 8% to 19% year-over-year even with the continued significant investments in R&D. In addition, I am also pleased to say that with this continued and significant progress and the strength of the Gilat balance sheet, the Board is planning to award a cash dividend to shareholders of about $25 million while maintaining our ample liquidity to fund future growth. And with that Adi, we are ready for your report. Please go ahead.

Thank you, Yona, and good morning, and good afternoon, everyone. I would like to remind everyone that our financial results are presented both on a GAAP and non-GAAP basis. We regularly use supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and to make operating decisions. We believe these non-GAAP financial measures provide consistent and comparable measures to help investors understand our current and future operating performance. Non-GAAP financial measures mainly exclude the effect of stock-based compensation and motivation of purchased intangibles, litigation expenses related to trade secret claims, expenses for tax contingencies to be paid under an amnesty program and initial recognition of deferred tax assets with respect to carry-forward losses. The reconciliation table in our press release highlights these data and our non-GAAP information presented excludes these items. I will start with some brief highlights of our 2018 full year results. Total 2018 revenues were $266.4 million compared to $282.8 million in 2017. Our total revenues include revenues from constructing the Fitel network in Peru which are accounted in the Terrestrial Infrastructure segment. Construction revenues were $25 million in 2018 compared to $78.3 million in 2017. As Yona noted, the decline was partially expected due to the wind down of the construction felt in issue of three regions in Peru but was also due to some delays in our progress coupled with the very slow inspection and approval process by Fitel. Excluding these construction revenues in Peru, our 2018 revenues were $241.4 million compared to $204.5 million in 2017, an increase of 18% year-over-year. Our Mobility segment revenues were $97.2 million compared to $88.4 million in 2017, about 10% year-over-year growth mainly due to an increase in IFC revenues. Our Fixed segment revenues which include also Cellular Backhaul revenues increased $144.2 million from $116.1 million in 2017, an increase of about 24% year-over-year, mainly due to higher revenues in Latin America, Asia Pacific and North America. Moving down the income statement, on a GAAP basis, we are reporting full year operating income of $21.3 million compared to operating income of $10.9 million in 2017. Net income on GAAP basis for 2018 was $18.4 million or $0.33 per diluted share compared to $6.8 million or $0.12 per diluted share in 2017. On a non-GAAP basis, we are reporting full year operating of $25.1 million compared to non-GAAP operating income of $18.5 million in 2017, an increase of 36%. Non-GAAP net income for 2018 increased to $18.2 million or $0.32 per diluted share from non-GAAP net income of $14.6 million or $0.27 per diluted share in 2017. Adjusted EBITDA for 2018 increased 34.6% to $35.2 million or 13.2% of revenues compared to an adjusted EBITDA of $26.2 million or 9.3% of revenues in 2017. I will now move to our financial highlights for the fourth quarter of 2018. Revenues for the fourth quarter were $69.7 million, compared to $82.7 million in the same quarter of last year and $62.8 million in the previous quarter. Our GAAP gross margin in the fourth quarter of 2018 was 37.3% of revenues compared to 30.5% in the same quarter last year and 38.5% in the previous quarter. Total operating expenses on a GAAP basis for the fourth quarter were $18.5 million compared to $19.6 million in the same quarter of last year and $18.2 million in the previous quarter. The main increase was in our R&D expenses which represented 12.8% of revenues due to increased investment in our product portfolio especially in our growth engines in-flight connectivity and Cellular Backhaul. Sales and marketing expenses were 7.9% of revenues while G&A expenses were 5.8% of revenues. GAAP operating income was $7.5 million in the fourth quarter compared to $5.6 million in the same quarter last year and $6 million in the previous quarter. GAAP net income was $5.3 million or $0.09 per diluted share, compared to net income of $3.4 million or $0.06 per diluted share in the same quarter over the last year. Net income in the previous quarter was $8.7 million or $0.16 per diluted share and include a one-time deferred tax asset benefit of about $4.1 million. On a non-GAAP basis, operating income for the fourth quarter was $7.9 million compared to $7 million in the same quarter last year and $6.5 million in the previous quarter. Non-GAAP net income was $0.10 per diluted share compared to non-GAAP net income of $4.7 million or $0.09 per diluted share in the same quarter last year. Non-GAAP net income for the previous quarter was $5.1 million or $0.09 per diluted share. Adjusted EBITDA for the fourth quarter was $10.5 million compared to an adjusted EBITDA of $9 million in the same quarter last year. Adjusted EBITDA for the previous quarter was $9.1 million. As of December 31, 2018, our total cash and equivalents including restricted cash net of short-term bank loans and credits were $104.2 million, an increase of about $1 million from the previous quarter. DSOs which exclude receivables and revenues from our Terrestrial Infrastructure segment, decreased to 71 days compared to 73 days in the previous quarter. Our shareholders' equity at the end of the quarter totaled about $239.1 million. Based on our strong balance sheet, as well as our continued growth prospects and cash generation, the Gilat Board of Directors expect to declare a cash dividend of $25 million or approximately $0.45 per share subject to final determination that the company meets the criteria set out in the Israeli Companies Law. Under the Israeli Companies Law, such dividend will be based on an audited financial statement to be issued in March 2019. As Yona mentioned, our management objective for 2019 are revenues of between $275 million to $295 million. Excluding expected terrestrial infrastructure construction revenues in Peru of approximately 11% from our comparable 2018 results. We expect GAAP operating income of between $23 million to $27 million and non-GAAP operating income of between $27 million to $31 million. We expect adjusted EBITDA to be between $38 million to $42 million representing an adjusted EBITDA increase of between 8% to 19% year-over-year. In closing, we have concluded another very good year at Gilat. We are focused on increasing our profitability year-over-year. We have a strong balance sheet with cash and equivalents of approximately $104 million which gives the company the flexibility to make the right decisions needed to support the execution of our strategy. In 2019, we will continue to focus on bottom-line profitability and continued growth in our adjusted EBITDA. That conclude our review. Thank you for your attention. I would like now to open the call for questions. Operator please?

[Operator Instructions] The first question is from Gunther Karger of Discovery Group. Please go ahead. Gunther, please go ahead.

Can you hear me?

Yes.

Yes, congratulations on an excellent year. The question, is there any color on the M&A activity ongoing?

Hi, Gunther. In respect of M&A, as I said, we have sufficient funds as of December 31, 2018, we have about $104 million even with the dividend distribution, we still have plenty of funds. We continue to generate cash from operations quarter-over-quarter. So we have the flexibility to do non-organic M&A acquisition. We are – it’s something that is on our table, but we don’t have anything concrete right now. We are looking for our opportunities and once we will have something, we will let everyone know.

Yes, thank you very much.

The next question is from Michael Hebner of IFS Securities. Please go ahead.

Yes, good morning guys.

Hi, good morning.

Do you hear me?

Yes.

Yes, we hear you.

The low flying satellites everybody is putting up in there, how are we taking advantage of that? Are we on any of these programs? And if so – and if not why?

Absolutely, we are active in this market. I cannot go into specific opportunities and our position in those opportunities but we are active. We are investing quite significantly. As I mentioned earlier, there are two achievements that we have reported already this year. One was the in-flight connectivity, the first ever airplane to fly in connect to a GEO satellite switching to LEO in back. This was done with the collaboration of Global Eagle and Gilat’s modem. The second one which we reported, not too long ago was the maritime trial again with a leader in this space. Also connecting to the Telesat LEO test satellite. So these two were announced last year. We are active in this market. I can also say that Telesat is not the only opportunity that we are engaged with. So definitely we are active in this market. Quiet a significant amount of our investments in R&D is directed towards that type of conservations and we are optimistic that we will get a portion of this business as those constellations mature reach decisions and start the launch.

Now, before you talked, somebody asked the question about acquisitions and stuff, if I was with the technology in a number of wins you have, why wouldn’t somebody try to buy you guys and so they would keep the technologies so they would – DishTV or whoever so they could utilize your technology and nobody else could?

That’s a question to the potential candidates. I don’t know, well, I think that what I would – I feel comfortable saying is that our Board is optimistic regarding our long-term prosperity and our long-term holders of our shares and do not intend to cash on these investments in the short-term. So, we have the trust – their trust and they are long-term investors. Maybe that’s part of the answer.

So with the Huawei stuff and President Trump and what do you see in the mechanics changing? Israel is kind of like on the fence and able to serve all these markets? What are you seeing out there?

I don’t want to go into politics and particularly Mr. Trump’s strategy and all of that. I can tell you one thing, we are doing good business in China. We intend to grow our business in China. This is one of our focus areas and sometimes things work in your favor, sometime against geopolitically and otherwise. But we rely mainly on our technology, on our team and I would also say we are very cautious regarding protecting our IP and this strategy has proven itself in China and we believe will continue to yield good results.

Thank you.

The next question is from Kevin Dede of H.C. Wainwright. Please go ahead.

Thanks. Hi, Yona. I appreciate offering a view how you see the year going aside from the construction work improve. Could you highlight what you think our – I mean, I know you just alluded to China being a nice growth avenue and also LEO satellites, but could you be more specific about where you see your biggest growth drivers? And how you see 5G playing into that?

Yes. The strategy that we portrait for 2019 is, first of all, we are going to be focused on improving profitability. I want to highlight that and the numbers are – were we stated earlier, we are currently projecting $38 million to $42 million. The way to achieve that is growing within but also expanding our growth engines and let me provide some more color. We talked about broadband, in 2018, we had a series of wins that we are pleased with. As I mentioned earlier, NBN, Gazprom, et cetera and we intend to continue and fight and hopefully win such geostationary opportunities. However there is no doubt in the next – one of the next expansion areas in broadband is NGSO, it could be layer, it could be mail but definitely this is a big opportunity or a number of opportunities ahead of us. So, the point being within broadband, we are expanding from GEO to NGSO. Moving on to in-flight connectivity, we declared our plan to expand within in-flight connectivity from the modem business to the antenna business. We continue to invest in that area and we believe that we will be successful in 2019. So, this could be a significant opportunity to grow in revenues and profits. This is regarding in-flight connectivity. Regarding Peru, we had a hiccup of course in 2018 because of the delay, but our plan is to move to operations in the first three regions in 2019 and add Cusco at the first half of 2020 and therefore we will start to see the fruit of our investment and we will start to benefit from what we have been aiming for all along which is the recurring revenue which brings profitability with them. So, in all areas, I think we have expansions and that’s why I use the word expansion in my previous conversations. We want to expand within the growth area and we see the opportunity for expansion within the – each one of those growth areas, which in turn will contribute to growth in profitability.

Okay. Thank you, Yona. Thanks very much for taking me through the detail. I really appreciate and congratulations.

Thank you.

The next question is from Raz Domb of Leader Capital Management. Please go ahead.

[Foreign Language]

Raz, we need to speak in English, please.

Okay, no problem. I would like to know if the guidance for 2019 include any deals in the antenna markets?

The guidance for 2019 includes a combination of several revenue mix including antennas markets. Although antenna is not going to be – in terms of revenue, it’s not going to be very significant, because we will see the initial start of those revenues. But definitely in our objective for 2019, we have antennas revenues.

Okay. Thank you.

Thank you, Raz.

We have a follow-up question from Gunther Karger of Discover Group. Please go ahead.

Thanks for taking the second question. Again on the merger of the General Electric Transportation and Wabtec, combining those two railroad freight and passenger systems which increases the interest in the spectrum. Any causes have you seen over the time companies are able to start work?

I am not sure I understand the questions. This merger is not relevant to us. I am not sure, I follow-up the question. Can you please repeat?

Sure. I was just referring – referencing the merger between General Electric Transportation and Wabtec which combines the two of railroad businesses, which increases the interest generally and going to the Chinese area that you are involved with the China railroad sometimes you provide the broadband systems to them. So any progress reports with regard to the Chinese project?

Few short update on our business in China with the CRRC, as that was switching from a Ka to Ku – opposite – sorry, from Ku to Ka. So basically, they are starting all the process right now. We haven’t gave up. We are supporting them. But it will take time. It will take time. In parallel, we will have some progress worldwide with trains not something that we can announce, but we see progress and we see some revenues earlier from selling antennas to trains.

Thanks.

[Operator Instructions] The next question is from Idan Rodkin of Rimon Investments Fund. Please go ahead.

Hi, guys. I just wanted to ask about the dividend. What’s the reason behind it? Why now? Why relatively so big? Thank you.

Hi, Idan. Up until recently we didn’t have profits to allocate dividend from based on the Israeli Companies Law. Now the company has a significant cash surplus for a long time. We are generating cash from operations. We generated excluding Peru, we generated only in 2019 almost $40 million from operations. Our expectation is to continue to generate cash in the future. We have significant investments in R&D and we have sufficient funds in cash both to support inorganic acquisition if we need and to pay cash dividend to long-term shareholder that believed in the company and stayed with the share for the long time. So believe it’s the right thing to do. $0.45 per share, it’s – one way it’s not a lot, in the other way it’s significant to a company that never paid a dividend, but still even after with the allocation, we will have more than $80 million in cash and equivalents. So we have plenty of cash to support our future growth.

And no debt.

And we have no debt, of course.

All right. Thank you.

We have a follow-up question from Michael Hebner of IFS Securities. Please go ahead.

Yes, that dividend, are you planning to paying that once or it’s going to be spread over for quarters? What’s your plan on that?

Once we will file our 20-F audited financials, the Board will take the final decision. But we expect to pay $25 million at once.

Okay. One-time dividend?

Yes.

Yes.

Do you plan on setting up a dividend reinvestment plan that somebody can address for something like a lot of the recent stuff or no?

No. Not at this point, no, not yet.

Okay. Now, what’s the thoughts behind, if I am dealing with somebody who is not paying, i.e. Peru, the idea that I am extending this relationship, how much more money is it costing to extend this relationship to get our return on investment? And then, why do we think we are going to…

I think we need to remember that first of all, Fitel or the Peruvian government paid upfront $100 million and they paid additional significant amounts during the construction phase based on milestones. Now, we are – through the end of the project, we finalized the majority of the projects and now we are waiting for them to accept the network and pay the last construction payment. So, here and there, we need to bring money from home to finalize the network, but overall, it’s not a big cash burden on the company and I would say that more than 95% is funded by advances we got from them – from the Peruvian government. And as Yona said, we are not there for the construction revenue which is more of a one-time revenue, we are there for the recurring revenue and we have up until today a backlog on those agreements of more than $23 million, $24 million a year of recurring revenue profitable ones and we can sell services over those networks and we expect overall that Peru alone will generate about $50 million a year in profitable recurring revenues. And we are already more than half way there together with the satellite recurring revenue that we have in Peru today and with the Fitel revenues and services that we already sold on the network. So, we believe that we will meet the $50 million target once the whole network will be active.

Now, what was the issue, why we didn’t get paid with this – we did some, they did change in administration or what was the pretext for not completing the original agreement?

It’s combination. They need – it’s a big network where a lot of poles, a lot of telecom nodes that they need to go one-by-one. Fitel didn’t have the manpower to do sell through that or have some kind of RFP for companies that will perform the testing. They started it, finished some of it and gave us some observation to fix and so, we need to fix it and get the acceptance. So, it’s a very long process, but we are on our way to get the acceptance. It might take a month or two, maybe another quarter, but we are on our way.

Good. But what are you doing to reach out to investors? I mean, there is very – I mean, you gave you had exciting future, exciting technology. You are in the most exciting area I think that’s out there, went out. And what are you doing to reach out to get more investors involve with this story?

We are investing a lot of CFO time and CEO time talking to investors both in Israel and in the U.S., talking to a lot of analysts who cover the market and we will continue to do so. And we are very open to everyone that wants to talk to us. We are having a talk. Hope to see you soon next time we will be in New York.

Good. Thank you.

Thank you.

There are no further questions at this time. Before I ask Mr. Adi Sfadia to ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1 (888) 326-9310. In Israel, please call 03-925-5901. Internationally, please call (972) 3-925-5901. Mr. Sfadia, would you like to make your concluding statement?

I want to thank you all for joining us on this call and for your time and attention. We hope to see you soon or speak to you in our next call. Thank you very much and have a great day.

Thank you. This concludes Gilat's Fourth Quarter 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.